HSBC has targeted MPs with demands for sensitive private information as part of a crackdown by the bank on "politically exposed" customers. The move has left some feeling they will lose their banking facilities unless they comply.

A Labour MP who is a longstanding customer of HSBC contacted Guardian Money to say he had been asked by the bank to disclose information about his finances, including accounts he has with other banks, and his "sources of wealth".

At first he thought it may be a "phishing" scam, where fraudsters try to obtain people's private details by masquerading as their bank or an official body, but the letter was genuine, and was followed up earlier this month by a phone call. The MP, who declined to be named, says he explained to the bank that the information being sought was "inappropriate", and when he asked what would happen if he didn't co-operate, the suggestion was that his account may be closed.

The MP – who still hasn't handed over the requested information – was left wondering what on earth was going on, and, when he got in touch with us, we were similarly bemused.

The answer, it transpired, is that HSBC has decided the MP is in a category of high-risk customers known as "politically exposed persons", or Peps. Even though, according to HM Revenue & Customs, he definitely isn't one of those. And he hasn't been singled out for special (mis)treatment. It is understood that every MP who banks with HSBC is being quizzed – and, presumably, other public figures, too.

If you thought a Pep was just a tax-free investment, think again. Peps are bank customers who are judged to pose a higher-than-average risk when it comes to the potential for being involved in money laundering. According to the Financial Services Authority (FSA), they are defined as people who have "been entrusted with a prominent public function by a non-UK country, the European community or an international body". There is a clear overseas connection. An example of a Pep would be a member of the European parliament or the president of a foreign country.

HMRC is clear on its website that "a UK politician isn't a politically exposed person". So why are UK MPs being treated as Peps by HSBC, and who else is the bank scrutinising?

The MP who contacted us was angry at the implication he may be tempted to indulge in criminal activity. He told us he receives no income other than his MP's salary, owns no overseas assets, holds no paid positions with international bodies, and doesn't even own a second home – he owns one house and rents a second for his own use.

"What I object to is being asked what other banks I have relationships with," the MP said. "Why should they want this information, unless there's some indication that there is something amiss? This is a private-sector organisation, totally unlike the tax authorities, who have every right to probe. What about the Data Protection Act?"

When he asked the bank employee if his account would be closed if he didn't co-operate, he says he was told the matter would have to be referred to a more senior person. "It was a sort of indication that if I didn't supply the information, that was it. My financial integrity would be questioned if they discontinued my account. If I went to another bank, they would want to know why."

He says that when he spoke to a different member of staff: "I explained that the information being sought was inappropriate and gave reasons why I didn't wish to [disclose it]. I made the point that I had nothing to hide."

HSBC has defended its decision to go beyond the letter of the law. It said in a letter to the MP that while it was required by the money laundering regulations to carry out additional checks on non-UK Peps, "we have applied these regulations consistently across the HSBC group, incorporating UK and non-UK Peps". It attempted to reassure him that "sensitive information" of the type it was requesting was kept on "highly secure systems with restricted access".

HSBC wouldn't discuss the MP's case, and wouldn't comment on the types of information being requested, and what can happen if you don't provide it.

It appears the FSA doesn't have a problem with HSBC taking a tough stance. The regulator takes the view that the rules are there for a good reason: to prevent banks taking money from criminals, overseas dictators and the like. The FSA has been hot on this issue lately, and has been imposing big fines on banks whose anti-money-laundering systems are not up to scratch – for example, where they fail to carry out proper checks on their Pep customers. In March, Coutts, the Queen's bank, was fined £8.75m for a series of errors, which included failing to gather sufficient information "to establish the source of wealth and source of funds of its prospective Pep and other high-risk customers".

So you can see why HSBC is taking this seriously. And quite right, too, many will say. However, some will wonder if the bank is overstepping the mark in terms of who it is targeting.

The money laundering regulations state that Peps can include heads of state, ministers, ambassadors, high-ranking officers in the armed forces, members of supreme courts and some other high-level judicial bodies, and "members of the administrative, management or supervisory bodies of state-owned enterprises". The definition also extends to these people's immediate family members – husband/wife/partner, children and parents – and "close associates".

The Information Commissioner's Office (ICO) told us it didn't appear that it had received a lot of queries about this issue. However, a spokesman says that if anyone is concerned that they are being asked for too much information, they can complain to the ICO. Under the Data Protection Act, organisations need to ensure that the data they hold on people is "adequate, relevant and not excessive".

In a statement, HSBC said it had "robust" anti-money-laundering procedures, and has had its policy on Peps since 2000. "Our policies are based on the regulations of each country we operate in, international guidance and industry best practice. We have applied best practice consistently across the HSBC Group, making no distinction between domestic and foreign Peps.

"This approach is supported by the most recent guidance of the Financial Action Task Force, published in February 2012, which states that 'in view of the growing concerns, it is important that the Pep requirements be expanded to cover domestic Peps'."

The MP said that after we contacted HSBC, he received a call indicating no further action would be taken. "However, the fact is that, in spite of how courteous they have always been in conversations with me, a very different impression was given last week if I did not supply the information requested, hence the reason I contacted your paper."